LKQ Corporation — FY 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; it is not a standalone quarterly filing. LKQ distributes aftermarket, recycled, refurbished and remanufactured vehicle parts, alongside self-service recycled parts. It operates in North America and the U.K. The company completed a two-for-one stock split in September 2012; reported historical per-share figures are split-adjusted.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $4.123 billion | $3.270 billion |
| Gross margin | $1.724 billion; 41.8% | $1.392 billion; 42.6% |
| Operating income | $438.0 million; 10.6% margin | $361.5 million; 11.1% margin |
| Net income | $261.2 million | $210.3 million |
| Diluted EPS | $0.87 | $0.71 |
| Operating cash flow | $206.2 million | $211.8 million |
- Revenue rose 26.1%; management attributed 21.9% growth to acquisitions and 4.1% to organic growth. Organic parts-and-services revenue increased 6.0%, while other revenue declined 5.8%, largely reflecting lower scrap and metals prices.
- FY 2012 EBITDA was $510.5 million, up from $418.1 million. EBITDA is a non-GAAP segment measure; FY 2012 included $17.9 million in supplier-litigation settlement gains.
- Cash used in investing was $352.5 million, including $265.3 million net cash used for acquisitions; property-and-equipment purchases were $88.3 million. Cash provided by financing was $157.1 million.
- At year-end, cash was $59.8 million, working capital $896.4 million, and total long-term obligations including current maturities $1.118 billion. Senior secured credit-agreement borrowings were $974.6 million; the receivables facility had $80 million outstanding. Revolver availability, after letters of credit, was $356.1 million.
- The company reported $3.723 billion in total assets and $1.964 billion in stockholders’ equity. It paid no cash dividend and said it did not anticipate one in the foreseeable future.
Fourth-quarter comparison
For Q4 2012, revenue was $1.068 billion versus $939.6 million in Q4 2011; gross margin was $445.1 million versus $391.8 million; operating income was $104.3 million versus $90.1 million; and net income was $62.2 million versus $56.1 million. Diluted EPS was $0.21 versus $0.19. Quarterly results included supplier-settlement gains and changes in the fair value of contingent consideration.
Material changes and management commentary
- LKQ made 30 North American acquisitions in 2012. Growth also reflected a full year of U.K. distributor Euro Car Parts (ECP), acquired in October 2011; ECP generated $696.1 million of 2012 revenue.
- Gross margin fell 0.8 percentage points. Management cited weaker scrap-metal economics, ECP’s lower-margin product mix, higher engine warranty claims and lower crush-only revenue, partly offset by lower vehicle acquisition costs and the $17.9 million settlement gains.
- Operating cash flow declined $5.6 million despite higher earnings. Management cited accelerated supplier payments, higher taxes and interest, among other factors; inventory was a significant use of operating cash.
- Management said ECP exceeded its 2012 earnout targets; LKQ accrued the maximum payout for that performance period. ECP’s 2013 earnout remains contingent on results.
Outlook, risks and contingencies
- For 2013, management estimated net income of $305–$330 million and diluted EPS of $1.00–$1.09, excluding restructuring and acquisition-related expenses and acquisition/divestiture gains or losses, including contingent-consideration fair-value changes. It projected operating cash flow of approximately $300 million and capital expenditures of $100–$115 million, excluding acquisitions.
- Key business risks include economic conditions and repair activity, competition and OEM pricing, insurer acceptance of alternative parts, salvage-vehicle supply and cost, scrap-metal prices, supplier concentration, foreign exchange, acquisition integration, and environmental, product-liability and regulatory exposure.
- Debt is subject to financial covenants and variable interest rates. LKQ reported covenant compliance at year-end and had interest-rate swaps fixing 64% of variable-rate credit-facility debt. A 100-basis-point rate movement was estimated to change interest expense by about $4 million over 12 months.
- Contingent-consideration liabilities were $90.0 million at year-end; maximum potential payouts under the disclosed arrangements were approximately $117 million. Fair-value remeasurement can affect earnings.
- A Texas investigation concerning alleged petroleum-product discharges at two facilities was under negotiation; the company expected any payment to have a de minimis financial effect. LKQ also disclosed environmental and other contingencies but did not expect their resolution to materially affect results.
- Supplier lawsuit settlements generated $17.9 million of FY 2012 gains recorded as a reduction of cost of goods sold. Claims against two remaining defendants were pending; further gains would be recognized only when realization is assured.
Important facts for investors to verify
- How much revenue and earnings growth was organic versus acquisition-driven, and how results look excluding the $17.9 million settlement gains and contingent-consideration adjustments.
- Whether gross margins and operating cash conversion stabilize, particularly given higher inventory and supplier-payment timing.
- ECP’s ongoing growth, integration progress and remaining earnout obligations.
- Debt maturities, covenant headroom, revolver availability and exposure to variable rates and foreign currency.
- Trends in salvage-vehicle costs, scrap-metal prices, engine warranty claims and environmental or legal exposures.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2012.